Updates + Inspiration

Philanthropy and Social Impact Bonds: The Role of Foundations in Social Innovation Financing

Over the past year, the GreenLight Fund has worked to educate ourselves on how Pay For Success financing might enable catalytic growth opportunities for the high-performing organizations we support. Given the diversity of approaches and partners that have shaped the first several Pay For Success deals, we asked the questions: where has philanthropy entered the equation? Where have funders successfully engaged to move this work forward? Salomon Moreno-Rosa reports on some of what we’ve learned…

With the emergence of Social Impact Bonds (SIBs) and other Pay for Success models, public, private, and nonprofit sectors are collaborating to adopt innovative financial structures that provide sustainable solutions for society’s costly problems. Pay for Success contracts are an alternative financing mechanism that supports social services intended to help organizations and governments achieve measurable outcomes within a clearly defined time frame. Payouts from performance-based contracts are contingent on service providers meeting the intended outcomes, hence “Pay for Success.” Service providers and, in many cases, Independent investors provide the capital that covers the operating costs of intervention programs and – should these interventions deliver their targeted outcomes – governments reimburse a marginal return on investment. In the several deals that have launched (or are in process), philanthropy has proven to play an integral role in establishing and driving a SIB market, as funders, educators and partnership builders. Foundations hold an unparalleled level of knowledge in and expertise on the social sector that can serve as valuable assets in creating and navigating Pay for Success contracts.

This graphic, from The Center for American Progress brief Social Finance: A Primer, illustrates the private-public partnerships necessary to create pay-for-success contracts.

1. Fostering partnerships is a clear role for foundations to play in ensuring SIBs galvanize the necessary funding and support they require.

The success of SIBs relies heavily on close, cross-sector coordination. Drawing together a number of stakeholders, including program providers, private-sector investors, intermediaries and government agencies, allow SIBs to produce greater social impact while forming and upholding a shared set of interests and desired outcomes. Earlier this year, the J.B. and M.K. Pritzker Family Foundation sponsored a conference designed to “assist public sector finance, private investment, legal professionals, and representatives from philanthropy, policy, and service providers [to] understand and develop innovative […] Pay for Success contracts.”[1] The goal of the convening, beyond drawing to the same table various actors from diverse sectors to better understand the SIB landscape, was to begin thinking about strategies for designing and implementing Pay for Success models in stakeholders’ local communities. Building cross-sector relationships early on helps ensure a smooth process, from conception to launch, in establishing a SIB-ready sector.

2. Foundations can also have considerable influence in the development of Pay for Success contracts by serving as educators for prospective stakeholders, cultivating positive attitudes around social financing models, and advocating for SIB-friendly policies.

One of the many tools foundations have at their disposal is their ability to draw upon extensive issue-area expertise and research. Foundations have the ability to share and disseminate impact data of supported programs to better inform the sector and bolster transparency, allowing for evidence-based models and best practices to garner attention and, ultimately, financial support through SIBs. Their deep knowledge of issue-related research and programmatic operations, along with extensive experience working hand-in-hand with service providers, government agencies, and private-sector groups, afford foundations the flexibility to assume a central role in conducting outreach and education for both the general public and those directly involved with SIBs. The Rockefeller Foundation, for instance, supported the Center for American Progress in creating educational resources to advance the learning of federal policymakers and philanthropic foundations around the concept of social financing. Learnings from those efforts acknowledged, “national foundations’ […] have a ‘comparative advantage’ in broad-based research and education programs designed to improve public awareness and support of SIBs.”[2] Positioning stakeholders to become well informed about the market and supportive of strategies that improve data systems and transparency is necessary for building a sustainable Pay for Success industry. Foundations can be fundamental in ensuring those pieces fall into place.

3. Foundations can also support the cultivation of a SIB market in another influential way: through grant making and direct investments.

Philanthropy has already set a strong precedent in helping finance SIB contracts, through both program-related investments (PRIs), a form of investment that generates both social and financial return, and partial guarantees of private-capital investments. PRIs have been used to completely or partly fund Pay for Success pilots, like in the case of the Laura and John Arnold Foundation, which utilized PRIs to assist the New York State SIB contract,[3] and in the case of the California Endowment, a private health foundation, which conducted feasibility tests of SIB transactions regarding preventative health in Fresno, California.[4] Recently, Bloomberg Philanthropies garnered national attention due to its $7.2 million grant in concert with Goldman Sachs’ investment – effectively guaranteeing 75 percent of Goldman’s $9.6 million total deal. Mitigating risk for private-sector investors has become a widely used mechanism for foundations to entice participation and reassure investors of financial compensation and return on investments. The Pritzker Foundation recently employed the technique in the Utah SIB by making a $1 million initial loan to the United Way of Salt Lake, which will open an additional 600 slots for early childhood education, in addition to providing $2.4 million as a subordinate loan to Goldman Sachs.[5] These examples illustrate the ways in which philanthropy can step in and blend different forms of capital to catalyze the development of SIBs, while simultaneously offsetting financial risks.

This map, from Social Finance’s report Foundations for Social Impact Bonds, shows the emergence of Social Impact Bonds across the Unites States.

By transitioning the social sector’s focus to emphasize prevention programs, SIBs provide a much needed, and cost-saving alternative to the current state of funding remediation services. A focus on prevention has the effect of reducing future costs on treatment programs, allowing governments the flexible capital to repay investors. Additionally, SIBs have the propensity to encourage greater government efficiency. By stressing the importance of funding evidence-based intervention models, governments are able to ensure value and impact for the money they spend. Analysis done by the Rockefeller Foundation demonstrate that SIBs compel the social sector to assess outcomes over the more conventional practice of measuring outputs, “which many foundations perceive is an important development to the sector.”[6] Foundations stand to gain significant benefits from participating in the procurement of Pay for Success contracts. Moreover, their involvement in setting the landscape for SIB development may prove instrumental, if not necessary. Wide praise and increased momentum for Pay for Success models are emerging across the US, and foundations are in the unique position to steer the conversation towards large-scale change and improvement to the social sector.